US FTC lacks data breach authority, says accused medical lab

The U.S. Federal Trade Commission has no jurisdiction or legal authority to bring a data breach complaint against an Atlanta medical laboratory, the lab said in a response to FTC charges.

The FTC, in an administrative complaint in August against small cancer-screening lab LabMD, acted in a way that was "arbitrary, capricious" and an abuse of discretion, lawyers for the lab wrote in a response to the FTC complaint Thursday. The agency has acted "contrary to constitutional right" and "in excess of statutory jurisdiction," LabMD's lawyers said.

LabMD, just the second U.S. company to challenge an FTC data breach complaint, is fighting back for the future of the company, the company's CEO, Mike Daugherty, has said. Daugherty, in a discussion a week ago, accused the agency of making up cybersecurity rules as it moves forward.

The FTC "has not published any rules, regulations or other guidelines clarifying and providing any notice, let alone constitutionally adequate notice, of what data-security practices" the agency believes it has authority to enforce, LabMD's lawyers wrote in the response.

LabMD has challenged the FTC's assertion that it has the authority to lodge complaints against companies that have data breaches after not taking, in the agency's eyes, appropriate cybersecurity measures. The challenges to FTC complaints by LabMD and Wyndham Worldwide could potentially end the agency's efforts to seek settlements in data breach cases, after 11 years of complaints and nearly 50 settlements.

Many of the settlements required the companies to implement new cybersecurity programs and submit to independent security audits every other year over 20 years. Among the companies that have settled FTC cybersecurity complaints are Twitter, Microsoft, data broker ChoicePoint, and retailers BJ's Wholesale Club and TJX.

A hearing on the FTC complaint against LabMD is scheduled before an administrative law judge next April. An FTC spokesman didn't immediately respond to a request for comments on LabMD's filing.

The challenge is an important one, LabMD's lawyers argued. Cause of Action, a government watchdog defending the company, "is taking up this fight because the FTC's attempt to exert authority that it does not have on a business that engaged in no wrongdoing is an abuse of agency authority that threatens American jobs," Cause of Action Executive Director Dan Epstein said in a statement.

The FTC accuses LabMD of having two significant data breaches, one in 2007-08 and one in 2012. In 2008, peer-to-peer security vendor Tiversa contacted the company, saying it had found a LabMD customer spreadsheet on a P-to-P network. The file contained personal information for more than 9,000 consumers, including names, Social Security numbers and medical treatment codes.

A business manager had the Limewire P-to-P software installed on her computer, against company policy, and had inadvertently shared the file, Daugherty has said. In its response to the FTC, LabMD said it "lacks knowledge" about whether the spreadsheet was shared on Limewire, but the company acknowledges that Tiversa "claimed" it was.

The company also doesn't know the facts related to an FTC allegation that the Sacramento, California, Police Department found LabMD customers' personal information and cancelled checks in the hands of an identity thief in October 2012, LabMD's lawyers wrote.

The company denies the allegation about release of personal information in 2012, Epstein said in a statement.

LabMD, in its response, denied that it failed to provide "reasonable and appropriate security" for personal information, as the FTC has alleged.

Grant Gross covers technology and telecom policy in the U.S. government for The IDG News Service. Follow Grant on Twitter at GrantGross. Grant's email address is grant_gross@idg.com.

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